Polar Capital Technology has published results for the year ended 30 April 2020. Over the period, the NAV total return was just ahead of that of the benchmark, +18.6% against +18.1% for the Dow Jones World Technology Index. Shareholders saw the elimination of the discount, however and this lifted their return to +31.0%. Following the elimination of the discount, the trust has begun to expand. 3.4m shares have been issued so far. The board is aiming to moderate the premium and expand the trust in a manageable way, for the benefit of all shareholders. The market cap recently broke the £3bn mark.
Technology has been the place to be in recent months. Global indices were flat over the year to the end of April and UK indices were down quite a bit. The pound weakened. The chair, Sarah Bates had this to say ” Over the last 10 years, with a starting point two years on from the Global Financial Crisis, your company’s NAV has risen by more than five times, or 19.2% annualised, from a starting NAV of £398.6m.
Such returns are spectacular and unusual. They do however mask considerable volatility and we would expect that volatility to continue. We worry about valuations and we worry that the sector has become a media favourite in some ways. At the same time, the longer term trends which guide our investment approach remain very robust, and in some ways the pandemic has given further strength to those trends. In a world where some sectors are in turmoil, we understand the attractions of ours.”
The manager, Ben Rogoff is reknowned for his comprehensive reports, which cover both economic developments and the evolution of the portfolio. We urge you to read the full statement, although the economic analysis will form a core part of our next monthly global economic roundup.
Some element of the performance review are worth highlighting here:
- a growing divergence between next-generation and legacy companies – “painfully apparent at the sector level with the performance of software (+23%) and semiconductors (+20%) in contrast to hardware (-3%) and networking (-11%).”
- US large caps dominated returns
- “During the final (coronavirus) phase of the year the internet subsector proved one of the greatest beneficiaries of stay at home / social distancing orders”
Performance drivers
“In the US, the most significant positive contribution to performance was made once again by AMD (+96%) as the company continued to execute on its product roadmaps, achieving its highest server CPU market share since 2013. In addition, the portfolio benefited from its overweight exposure to SaaS companies which delivered strong growth against a more challenging economic backdrop. Strongest performance was reserved for those with solutions that helped facilitate work from home (WFH) such as RingCentral (+104%), Everbridge (+56%) and Five9 (+54%).
The need to support remote workers also benefited next-generation security companies such as Cloudflare (+39%) and CrowdStrike (+32%) while social distancing measures helped the likes of Amazon (+33%), HelloFresh (+84%), PayPal (+20%) and Netflix (+18%). Stock selection was positive across all major regions and nearly all market capitalisation tiers with the exception of small-caps, which accounted for <2% of the portfolio. Relative performance was also positively impacted by underweight/zero positions in a number of index constituents including Cisco, Broadcom, SAP, Oracle and DXC Technology which struggled with cloud migration, cyclical sensitivity and/or leverage. The portfolio also benefited directly from one corporate action following the purchase of Tableau Software by Salesforce.com at a 42% premium. This, together with a number of private equity transactions helped support software valuations during the year.
In terms of negatives, the most significant detractors were our large but still underweight positions in both Apple (+54%) and Microsoft (+44%). Apple enjoyed a banner year driven by AirPods, services and a better than expected iPhone 11 launch while Microsoft benefited from Office365 and Azure growth, with remote work driving rapid adoption of Teams, its unified communication and collaboration platform. In addition, a number of 2019 IPOs such as Pinterest (-31%) and Uber (-37%) performed poorly as a result of inconsistent growth and a loss of investor appetite for long-duration assets. Relative performance was also hindered by a number of other individual stock moves due to disappointing earnings progress and/or valuation deratings such as Arista Networks, 8×8 and Pagseguro Digital. Finally, our cash position (which averaged 5.5%) also detracted from performance in what ended up being another strong year for technology stocks. However, this drag was almost entirely offset during the period of market turbulence by strong gains in our NASDAQ put options that contributed nearly 100bps to portfolio performance. During the year, there was a significant divergence between large (+21%) and small-cap (-3%) US technology stocks as measured by the Russell 1000 and 2000 technology indices.”